As the demonetization juggernaut makes its way through the markets, we can assess the impact of it on various assets. One thing is clear: the government is not budging from its stance, and no rollback is likely, with the Supreme Court also refusing to stay the government order.
In addition, the PM has made clear that this is the first of a longer crackdown on the informal and black economy, with the focus moving to property and gold as well. The immediate impetus for the government's move may very well have been the rising NPAs for banks. The large influx of cash into the banking sector is exactly the kind of event that the banks needed to address balance sheets overloaded with debt. As the informal economy crackdown continues, execution of these reforms will be an important piece to watch, since the black economy has deep roots in Indian markets, and each event will cause a fair bit of upheaval.
Overall though, while the media has focused its coverage on the chaos outside ATMs and banks, the long-term impact of the move is likely to be a healthy one, boosted by the large bank deposits and tax revenue collections.
An additional step that the government could take in the coming days to address the cash crunch the people, particularly the low-income are facing: an Aadhaar-linked cash transfer for the poor, to help tide over their difficulties.
How will demonetization impact Real Estate?
In the days after demonetization, real estate brokers have begun to make some calls. "The buyer wants to pay 20% of the amount in old notes," they would tell the property seller. In the cases of family estates, with multiple bank accounts available for people to deposit old money, the percentage of old notes went up even higher, according to sources.
But with the government promising scrutiny of deposits, people are growing cautious. This is impacting the real estate market in India, and experts expect prices to fall across the country, especially in Tier 2 and 3 towns, where much of the economy runs on cash. Major real estate companies like DLF, Godrej Properties and Oberoi Realty have lost between 10-16% of their market value in the past week. Analysts are expecting real-estate prices to fall over the long term with the black money component becoming smaller, but that remains to be seen. Housing finance companies will also be affected, as households with these loans face a liquidity problem.
Indians keep their faith in gold
Indians' belief in gold as the safest asset has only grown stronger since demonetization, with many families converting old notes to this asset. However, scrutiny on jewellers has also increased since the move, so it remains to be seen how the gold markets will shape up in the long term as 'processing points' for black money.
Flight tickets and consumer goods hit
These industries were coming off their post-festival high, and have hit the ground with a big thud thanks to demonetization. Sales of flight tickets are down, as plans for winter vacations have to wait as the richer households sit this season out. Sales of consumer goods will also be muted this quarter as savings shrink or become unpredictable as banking infrastructure remains overloaded in processing demands for cash withdrawals and exchange of notes. The move to have an indelible ink mark on the fingers of people withdrawing money to keep to the daily limits will also mean that avenues for additional liquidity are being closed off.
Debt markets are the winners from demonetization
Worth noting here: so far, the rupee value has not shifted down considerably, despite the dollar rising on the Trump victory. Interest rates are likely to now fall since inflation pressures have faded, with fewer purchases happening. Limited supplies in North Indian markets at least for the next week due to the inability of trucking companies to keep the fleets running will exacerbate the problem for consumer essentials as well in the short term. In the longer term, government revenues are set to go up with additional money entering the banking system and increased tax collections. All this means that an interest cut is likely to happen in the coming months, a boost for debt markets.
Photo: an auto driver refuses the old 500 rupee note. Associated Press
